Electronic Manufacturing Services - Transforming Dreams Into Devices: Motilal Oswal's Thematic View

Motilal Oswal Report

We initiate coverage on: a) Kaynes Technology India Ltd., Avalon Technologies Ltd., Syrma SGS Technology Ltd. and Cyient DLM Ltd. with a 'Buy' rating; and Data Patterns India Ltd. with a 'Neutral' rating.

These companies are some of the key players operating in the Indian electronic manufacturing services space. We believe that these EMS companies are well positioned to gain market share further and deliver robust earnings.

The EMS industry has evolved over the years, aided by increased outsourcing of manufacturing activities by original equipment manufacturers. However, still a lion’s share of the total electronics market globally/in India (~65%/77%) is manufactured in-house. Nevertheless, the shift towards EMS has been taking place at a faster rate.

With more emphasis on value-added services:

Further, the EMS companies – having achieved manufacturing expertise – are climbing the value chain by offering design (original design manufacturing), testing and component sourcing services that are high-margin segments.

Newer/advanced technology plays the role of a catalyst: Simultaneously, the electronics market is also evolving rapidly with the onset of new technologies such as electric vehicles, 5G, clean energy, artificial intelligence, virtual/augmented reality and Internet of Things. Newer the technology, higher is the electronics content per devices along with increased complexities. This accentuates the need for EMS companies.

Domestic electronics industry at an inflection point: Further, India is witnessing a strong growth in the domestic electronics industry with an expected compound annual growth rate of ~18% during FY21-26. The growth will be fueled by a shift of electronics market from China, govt.’s thrust on making India a global electronics hub and rising export market.  India offers huge headroom for growth.

The global electronics market size was ~$2.5 trillion in CY21; of this the global EMS market was valued at ~$880 billion. India formed a small part of the global EMS space with ~2.2% ($20 billion) share, but it is expected to grow the fastest (at 32% CAGR over CY21-26).

Backed by indigenisation of raw materials and low-cost labor:

The Indian EMS industry has been at a nascent stage at only 0.6% of gross domestic product in FY22. However, it is likely to catapult to a massive Rs 6 trillion by FY27, replicating the success stories of other key sectors such as IT, specialty chemical, auto ancillary and textile. Two key factors that will contribute to this colossal growth are: creation of electronics ecosystem (indigenizing of raw materials) in India and easy availability of low-cost labor.

Cherry-picking the unlisted gems: Among the unlisted EMS companies, there are several sizable players that have demonstrated strong growth and some are leaders in their respective EMS space too. Notable ones among them are Bharat FIH, VVDN Technologies and SFO Technologies.

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